There are a number of issues that the IRS frequently examines on audit. Car and truck expenses are high on that list. The applicable rules and court cases must be reviewed before presenting records to the IRS to substantiate car and truck expenses. This article examines several of these rules and court cases.
Deductible Car & Truck Expenses
Taxpayers are able to deduct ordinary and necessary business expenses. This includes the cost of operating a car or truck that is used for work. While this may sound straightforward, the topic is more complex than one would think. There are a number of rules that have to be considered.
For example, to qualify, the underlying activity or purpose for using the car or truck has to rise to the level of a “trade or business.” This is something more than that of an investment activity for a profit. For example, in Samadi v. Commissioner, T.C. Summary Opinion 2018-27, the court concluded that the taxpayer’s car and truck expenses for driving around looking for houses to buy and flip were not deductible, as the taxpayer’s buy-and-flip activity was not substantial enough to be a business.
Work includes driving from one work location to another. In cases other than someone who works out of their home, the term “work” does not include driving from home to work–driving from home to work is a non-deductible personal expense.
Before 2018, the business of being an employee could also count. Under the prior law, non-owner employees could deduct car and truck expenses incurred for their job. With the passage of the Tax Cuts and Jobs Act (“TCJA”) in late 2017, Congress made these expenses non-deductible for employees.
It should also be noted that reimbursed expenses do not qualify. This is true even if the taxpayer was not reimbursed for these expenses, but could have been reimbursed had she asked for reimbursement. This often turns on the terms of the employers reimbursement policy. These nuances will likely be less important now that car and truck expenses for employees is not deductible.
The Amount that is Deductible
Taxpayers can deduct their actual expenses incurred or the standard mileage rate.
Actual expenses can include just about anything related to the ownership and operation of the car, such as gas and oil changes, interest on the car loan or rental lease payments for the car, repairs for the car, repairs and maintenance for the car.
The standard mileage rate varies from year to year. It is $0.545 per mile for 2018. For most taxpayers who incur car and truck expenses for work, the standard mileage rate produces a larger deduction.
The general rule is that taxpayers have to keep records to support deductions taken on their tax returns. This rule applies to car and truck expenses.
In addition to this general rule, taxpayers have to keep additional records for car and truck expenses. While there is no specific type of record or format required, these additional records have to show:
- The amount of the expense.
- The time and place for the travel.
- The business purpose for the travel.
The absence of even one of these elements is fatal for the deduction. Take the business purpose element. The courts have also made it clear that evidence of a business purpose is required. For example, in Cai v. Commissioner, T.C. Memo. 2018-52, the taxpayer produced gas receipts, a car loan statement, and a spreadsheet with a total amount of miles driven and and the maintenance expenses. The taxpayer didn’t provide a business purpose for the expenses, which resulted in him not being able to deduct the expenses.
The courts have also made it clear that they will not use the Cohan doctrine to estimate the amount of the expense. See, e.g., Sanford v. Commissioner, 50 T.C. 823, 826-829 (1968). The Cohan doctrine refers to a court case in which the court concluded that it could estimate the amount of a deductible expense, as long as there was some evidence that the expense was incurred and evidence in the record that would allow the court to make an estimate.
The Mileage Log or Other Evidence
The law says that the taxpayer can meet the substantiation requirements in either of two ways: by means of adequate records, or by the taxpayer’s own statement, corroborated by sufficient evidence.
Adequate Records. The regulations clarify that adequate records includes “an account book, diary, log, statement of expense, trip sheets, or similar record” in which the taxpayer records an expenditure or use of property “at or near the time of the expenditure or use.”
There are quite a few court cases that have considered the adequate records option. These court cases generally look at mileage logs that do not appear to be accurate, such as cases where the mileage log includes round numbers for the miles driven as in Weaver v. Commissioner, T.C. Summary Opinion 2018-40.
The Ayissi-Ethoh v. Commissioner, T.C. Memo. 2018-107, case provides another example of this type of flaw. In the Ayissi-Ethoh case, the mileage log described every trip as involving a “business presentation” or “meeting.” The court said that this is insufficient.
Taxpayer’s Own Statement. There are a few cases that considered the taxpayer’s own statement corroborated by sufficient evidence. For example, in v. Commissioner, the taxpayer had reconstructed his mileage log before the trial. For client meetings, he used his iPad calendar records. For administrative miles, he used his American Express and United Mileage Plus statements. The court seemed to suggest that the calendar entries would have been sufficient, had the calendar logs been provided to the court. It also noted that the credit card statements and other documents in evidence were insufficient to corroborate the business purpose or location of the expenses.
These taxpayer statement and corroborated evidence court cases can be summarized as follows: a taxpayer can recreate a mileage log and testify as to the mileage log, but when it comes to substantiating the business purpose or location of the expenses, one must have some form of contemporaneous record that was developed by the taxpayer.
This sets a pretty high bar, but not one that is impossible to prove-up with sufficient effort. This gets to the heart of the issue. Mileage logs are not kept because they are tedious. Even the process of recreating them is tedious. Very few taxpayers take the time to prepare adequately reconstructed mileage logs. This is even true for those taxpayers who are readying their records to challenge this very issue in court.